I’ve been making minimum payments on my credit cards, but the balance does not seem to go down. Why is that?

Article by R. Joseph Ritter, Jr. CFP® EA

The minimum payment is the smallest amount the credit card company will accept to keep your account current. If you are carrying a large balance on your credit card, the minimum payment is most likely being applied toward interest with only a very small percentage being applied to principal (the actual amount of the charges).

Unlike a home mortgage or vehicle loan, payments are not amortized over a particular period of time.  In a mortgage or vehicle loan, your monthly payments are typically a fixed amount that you pay over the life of the loan with each payment being applied toward both interest and principal. Minimum credit card payments are not necessarily amortized over any length of time.  Another way of looking at it would be that, even if you did not make any new purchases/charges to add to your balance, the credit card company does not amortize your payments over 3, 5, 10 or even 30 years. Thus, you could be paying on the credit card balance for a long time.

To reduce the balance on your credit card, you will need to make much larger payments than just the minimum payment listed on your credit card statement. To assist you in formulating a plan to pay down your credit card balance, please contact us, so that we can review your financial situation with you.

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